High rates, and a bubble signal in defensive stocks

Easy version of DK's November 2 note on JPMorgan and BofA. This is not investment advice. An options-trade suggestion was left out.

In one line, JPMorgan said U.S. stocks could live with a 10-year yield of 5.5% to 6.0% if profits hold up. BofA saw bubble signals in health care and staples, where money hid from AI worry.

A 10-year yield is the price the U.S. government pays to borrow for 10 years. The report said the 30-year yield was about 5.35%, near a 20-year high. Long Treasuries fell 7%, and the S&P 500 forward P/E, price divided by expected profit, fell about 3 turns, but the index was still up ▲ 12% for the year. The body expected profit growth of 28% in 2026 and 22% in 2027. The summary said both this year and next were in the 20% range. I left both wordings. Most company debt was fixed-rate, so interest costs would rise slowly. That assumed small hikes. The biggest risk named was a worse Middle East conflict. The market had priced two hikes by April.

JPMorgan said balance sheets mattered more than guessing the rate path. Cash-rich firms could hold up. REITs, companies that pool buildings and pass on rent, and smaller stocks that depend on debt could shake each time rates rise. In past periods when long yields rose faster, energy and financials had done better. That was a past note, not an instruction.

BofA said bubble-risk scores for health care and staples were among the highest of global assets. Only about 15 S&P 500 stocks showed a bubble signal, versus 50 to 100 at the dot-com peak. JPMorgan said the semiconductor index's drop versus the S&P 500 had reached 2008-like size, and that selling came more from crowded positions leaving than from earnings. It still did not change its fundamental view, because the gap between sales needed to justify AI spending and actual sales was 4 to 5 times. Simply selling AI and hiding in defensive stocks, things people keep buying when the economy shakes, was not described as safe. The check for a real bounce was hyperscaler capital-spending plans and AI credit spreads. A hyperscaler is a giant company that runs cloud computing itself.

Three lines to keep. The high-rate story assumes profits keep coming. Hiding in defensive stocks does not mean those stocks are cheap. A large chip drop and a still-large AI sales gap were written side by side.

Left out: the option structure and the stock lists inside rate baskets. 5.5% to 6.0% is JPMorgan's view.